The Short-Term Downtrend Continues Amid Market Turmoil

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The short-term downtrend continues. It looked like the start of a rally on Thursday, but Friday's selling wrong-footed the buyers. The PMO has risen a bit during the market turmoil of the last few weeks, so we know there are at least some stocks that aren't being sold.

This is a tough time to try to make money trading the stock market, at least if you are trying to use my trading style where you buy the oversold pullbacks and sell the overbought rallies.

I won't recap the action because I'm sure you already know what happened. But here is a really good quote that explains the big reversal on Thursday:

"The biggest one-day gains in stock market history have come in bear markets, not bull markets. This usually happens when short sellers grow complacent in the weak action and take too much risk." -, Oct. 15.

This quote speaks directly to me. Note to self, don't grow complacent holding short positions in a bear market. The rallies are killers.

The bullish percents aren't telling us much in this chart other than that they are at low levels. Similar to the PMO, this chart says to either buy stocks in anticipation of the next rally or, better yet, sit in cash.

This junk bond ETF broke down early on Thursday morning, and I thought that the bottom was finally falling out from under the market. But it rallied nicely and closed above the lows of the prior few weeks. A dip below support that quickly reverses higher is often a fairly bullish short-term price pattern.

Now we look for this ETF to close above the horizontal resistance and pop up above the downtrend line. If it does that, then I think there is a chance that we'll get the next short-term bear-market rally for stocks.

This chart of the broader market S&P-1500 is similar to the chart of the junk ETF. Looking at this chart, a short-term rally could easily start next week. However, the market is completely in the grip of a larger downtrend and any rally would be into resistance and therefore difficult to trade.

Then again, we just had a similar setup in July that became an incredible August rally. And now we are approaching November which is usually the best month of the year for stocks. What to do?

I'm still planning to buy into the next short-term rally. One reason I will buy is that I know myself and I know that if I don't buy early in the short-term cycle and the market rallies, then I'll end up buying at the wrong time. So, for me, I think it is best to try my hand with a modest position in a few stocks with the best-looking charts so that I am participating. I'm not recommending that strategy to anyone. You have to decide for yourself.

Bottom line:  I have very few positions at the moment. In my trading accounts, I'm long a few conservative healthcare stocks and I'm short one technology stock. When we finally get the next short-term rally, I'll probably add to the long positions that I already have, and then wait until I can trim into strength.

Here are a few more charts that might be interesting.

I used to trade a lot of gold miner stocks, so I can't resist following the group. This correlation of the Japanese yen with the miners is strong. I don't think there will be a sustainable rally in the miners until the yen firms up.

Thursday morning, stocks were way down as yields pushed up to new highs. Then yields settled down and stocks rallied mid-day. Friday, yields rallied during the day, and stocks sold off. You get the picture. Watch these yields. Right now, if yields push higher, then stocks are going to disappoint.

The NYSE index is resting just above important support. This would be when you'd expect the index to try and reverse higher, even if it is only temporary.

I've been watching Tesla and Apple, as they are the market leaders. This is a strong support level for Tesla.

The price of oil is critical during bear markets. When oil breaks down, we know that we are in the final stage of the bear, and even though the economic pain will be intense, the market will be getting close to bottoming out to start the next bull. This chart continues to look like a top, and fake-out rallies like last week are part of the topping process.

The major indexes have pulled back quite a bit this year, but do you think it is possible to see these indexes touch the lows of March 2020? That is a really long way to fall, but I'd rather be prepared for the possibility.

The European stock markets are weak along with the euro. The trend doesn't look good right now, but eventually, I'd like to be a long-term holder of this ETF. I'm thinking that there are some really good companies over there that are selling at bargain prices. For now, however, I will be shorting this index when this smoothed stochastic gives the signal.

Outlook Summary

  • The short-term trend is down for stock prices as of Aug. 19.
  • The economy is at risk of recession as of March 2022.
  • The medium-term trend is lower for treasury bond prices as of Sept. 13.

More By This Author:

The Short-Term Downtrend Continues Despite The Rise
The Market Is Gripped By A Bear
A Significant Shift In Sentiment Was Seen

Disclaimer: I am not a registered investment adviser. My comments reflect my view of the market, and what I am doing with my accounts. The analysis is not a recommendation to buy, sell, ...

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